Abstract
We show how monetary policy inertia can help alleviate problems of indeterminacy and non-existence of stationary equilibrium observed for some commonly studied monetary policy rules. We also find that inertia promotes learnability of equilibrium. The context is a simple, forward-looking model of the macroeconomy widely used in the rapidly expanding literature in this area. We conclude that this might be an important reason why central banks in the industrialized economies display considerable inertia when adjusting monetary policy in response to changing economic conditions.
| Original language | English |
|---|---|
| Pages (from-to) | 1177-1212 |
| Number of pages | 36 |
| Journal | Journal of Money, Credit and Banking |
| Volume | 39 |
| Issue number | 5 |
| Publication status | Published - Aug 2007 |
Keywords
- monetary policy rules
- determinacy
- learning
- instrument instability
- RATIONAL-EXPECTATIONS
- TERM STRUCTURE
- RULES
- INSTRUMENT
- STABILITY
- MODELS